Cable TV Operators' VoIP Threatens Bells
BY REINHARDT KRAUSE
INVESTOR'S BUSINESS DAILY
Thursday, June 3, 2004
investors.com
Emerging Internet phone services could cost local phone companies $5 billion to $7.4 billion in annual revenue by 2008, say recent, separate reports from two credit rating agencies and brokerage firm Sanford C. Bernstein.
Voice over Internet protocol, or VoIP, gives users a new option for getting phone service. Instead of the normal circuit-switch method, calls come via broadband phone or cable lines, using the Internet method of sending data, or voice, in packets.
Startups such as privately held Vonage sell VoIP services that work over either speedy Internet-ready phone lines or cable lines. The VoIP leader, Vonage has signed up more than 155,000 customers. AT&T and other carriers also are offering VoIP.
But the biggest long-term threat to local Bell revenue will come from cable TV system operators that offer VoIP as well as circuit-switched phone services, many analysts say.
[graphic in url re Call of the VoIP: from about nil last year, the number of U.S. voice over Internet protocol phone service subscribers is expected to approach 4 million by the end of next year.
"Cable system operators realize that the residential voice business is nearly twice the size of the entire video (pay-TV) business," said Bernstein analyst Craig Moffett.
For users, VoIP promises savings. But how much savings and at what price in terms of service quality are issues open to debate. Analysts question if cable would enter into any price war, since phone companies could attack cable's stronghold markets; they also note that, unlike normal phone service, VoIP goes out if a home loses power and that there can be issues with 911 service.
No Poaching
Still, Bernstein estimates that cable firms could grab about $7 billion in local phone revenue by 2008, vs. a total U.S. local voice market of roughly $40 billion. The $7 billion is based on cable firms providing phone services to about 16.8 million homes, up from 2.3 million in 2003. Roughly 85% of those 16.8 million homes will be making VoIP calls, Bernstein says. The rest get the more traditional circuit-switched phone service, which some cable firms are offering.
FitchRatings, a credit-rating firm, estimates local phone company revenue losses at $7.4 billion by 2008. Fitch analyst Michael Weaver says that at least one in five homes that get broadband Internet access will be making VoIP calls five years from now. And the "vast majority of voice over IP will be attributable to cable system operators," he said.
Still, Weaver doesn't think cable firms will offer particularly low prices in order to poach phone customers.
"Most cable system operators will not price in a way designed to gain a huge amount of market penetration," he said. "There's no reason to target low-spending customers, at least initially."
Some analysts point to other reasons why cable firms would think twice before launching a phone price war. Banc of America Securities analyst David Barden says cable firms are wary of provoking a harsh response from the Bells — Verizon Communications, (VZ) Qwest (Q ), SBC Communications (SBC) and BellSouth. (BLS)
"The chief risk is that (if cable firms are too) successful in VoIP, that could induce the Bells to be more aggressive in the data and video businesses," Barden wrote in a note to clients.
That would put pressure on cable's core pay-TV business, he says.
Local Bells, though, would have to open their wallets to make a big video push. They'd either have to invest in fiber-optic wiring going into homes or buy a satellite TV broadcaster. So far, only Verizon seems interested in building local fiber networks that reach residential neighborhoods.
Bruce Leichtman, head of researcher LRG, expects cable firms to use phone services as a marketing tool. He says that by packaging VoIP services with speedy Internet access, cable firms plan to attract and hold onto the highest-spending consumers.
Big Business
"VoIP will help provide added glue for high-value customers," he said. Leichtman doesn't expect cable firms to wage a price war.
But Bernstein's Moffett says that most cable firms won't limit themselves to using phone services as a marketing tool to reduce customer turnover, called churn. He says too much revenue is up for grabs.
"It's not going to be just a churn-reduction opportunity for cable companies," he said. "The voice business is too large to be thought of that way. You're going to see a range of strategies from cable operators."
Time Warner Cable, Cablevision Systems, (CVC) and Cox Communications (COX) have rolled out VoIP services in some areas.
Moffett says Cox has undercut local Bell pricing by only 10%. Cablevision and Time Warner Cable, though, have been more aggressive. Moffett says the Cablevision's $35 price for unlimited local and long-distance calls is about 40% lower than Bell "unlimited" offers, while Time Warner's $40 rate plan is about 33% lower.
Still to be heard from is the biggest cable firm, Comcast. (CMCSA) It plans to offer VoIP to 40 million households by the end of 2006.
More Regulation?
Aryeh Bourkoff, analyst at UBS Investment Services, says Comcast's prices will be similar to Time Warner Cable's.
In its report on the impact of VoIP services, bond rater Standard & Poor's pegs local Bells revenue losses at $5 billion a year by 2008. That figure doesn't include non-Bell local phone companies.
The Bells, too, plan to offer VoIP. But Fitch's Weaver doubts that will happen on a wide scale until 2007 or so.
Some analysts say that the Bells have touted plans to offer their own VoIP products as a way to influence regulatory policies.
VoIP calls aren't regulated the same as calls made over public phone networks, which helps VoIP providers offer lower prices to users.
New York State's regulators, though, in mid-May said Vonage's VoIP service should be subject to the same rules as other phone calls.
Federal regulators are studying whether VoIP calls should be regulated. |
